The Legal Reality of Hybrid Strata Loans and Why Lannock Steers Clear of This Product

Recently, leading strata lawyers Bugden Allen Group Legal published a detailed analysis of the so-called hybrid strata loan products. Their conclusion was unambiguous: These hybrid structures do not comply with strata legislation in either New South Wales or Victoria.

At Lannock, we’ve seen these types of loan structures enter the market, disappear and reappear over time with only minor changes. We evaluated hybrid loan structures carefully, chose not to offer them and stand by that decision. This article explains why and what the Bugden Allen analysis has now confirmed for the wider strata community.

What is a hybrid strata loan?

A hybrid strata loan is a financing structure where an owners corporation borrows simultaneously from two sources;

• an external commercial lender, and

• individual lot owners (Lending Owners) who choose to make an unsecured loan through a Trust to the owners corporation (the corporation of which they are also a member).

The Liability Risk: Lending Owners often mistakenly believe that their unsecured loan to the owners corporation exempts them from the obligations of the owners corporation's external loan arrangement. It does not. All lot owners share unlimited joint and several liability for their owners corporation’s obligations, which include all borrowings, both the external commercial debt and any amounts owed to Lending Owners.

The hybrid strata loan structure creates a financial paradox where the Lending Owner is an unsecured creditor to the owners corporation, yet also liable for its debts:

If the owners corporation defaults on its external loan, then the Lending Owner is liable (via levies) to contribute to repaying that external debt, even though the owners corporation already owes them money from their initial unsecured loan.

A hybrid strata loan creates two tiers of members (owners) within the owners corporation. However, it does not create two tiers of liability.

Understanding hybrid strata loans: The gap between market appeal and structural reality.

A strata lender is responsible for ensuring its loan products comply with regulatory requirements and strata legislation.

The first of these two points is our problem – if a strata lender chooses to ignore their accountability under ASIC’s Design and Distribution Obligations or fails to register their trust as a Managed Investment Scheme under the Corporations Act, then there are major problems – but those failures will only affect the owner corporation when they bring about the early demise of the funder.

Compliance with strata legislation does, however, become the owner corporation’s problem.

Strata committees face genuine tension when owners are divided between borrowing and levying. A product that appears to resolve both preferences within a single structure has obvious, if superficial, appeal.  However, “appeal” is a very different matter to “merit”.

That appeal is real. The lending owner option itself may be the factor that makes a borrowing motion politically viable at a general meeting - wealthier owners who would prefer a special levy are brought onside by the prospect of becoming lenders and receiving payments from the owners corporation. The owner-lending mechanism may be the structural concession that allows the motion to pass.

Ironically, it is precisely that marketing appeal which marks the first point of product failure in the hybrid strata loan. The question of compliance with ASIC's Design and Distribution Obligations arises directly from it – particularly where choice architecture is concerned. In the strata context, where decision fatigue and the associated preference for apparent ease of adoption must be considered, those design obligations carry real weight (see RG 274).  The “appeal” of a hybrid strata loan lacks “merit”.

Adopting a product because it serves the political purpose of breaking deadlocks amongst owners is fraught.

Glossy marketing appeal is a very different thing to a well-structured loan product that is compatible with strata legislation. When we examined the current structure of hybrid strata loans and their repayment mechanism, we had concerns that went well beyond the sales pitch and product-market-fit. In their current form, these loans are cane toads: released as a solution into an ecosystem without a proper understanding of the environment and toxic to everything they touch.

What did Lannock see in the hybrid strata loan structure that was concerning?

Owners Corporations are statutory bodies – entities created by legislation.

Understanding this is essential to understanding strata finance – because the foundational doctrine of statutory bodies is that of ultra vires – namely that any act by the statutory body which exceeds the powers conferred on it by its enabling legislation is ultra vires (literally “beyond the powers”). And any act which is ultra vires is invalid.

This means that when considering what owners corporations can do, the approach is very different to considering what ordinary companies can do, which is mostly anything not prohibited by law. An owners corporation starts from the opposite position: It can only do what it is authorised to do by law (its enabling legislation). Even judicial review is guided by the logic of the ultra vires doctrine. 

In this light, the most obvious problem is the levy credit mechanism. Under strata legislation, levies must be raised across all owners according to their lot entitlement.

The hybrid arrangement purports to enable Lending Owners (those who might have preferred a special levy but in this structure have made a loan to the owners corporation) to not make levy payments in real monetary transfers between bank accounts to service the owners corporation’s borrowings. Instead, the owners corporation grants each Lending Owner a “credit” equal to the levy amount which is offset against what the owners corporation owes them in loan repayments.

On paper, hybrid strata loans might appear “clever”. In practice, they contain insoluble structural problems that someday will come home to roost.

Specifically, we identified the following concerns when we modelled these structures:

• The levy credit is not allowed under strata legislation. Strata legislation is prescriptive about how funds are raised and disbursed. Neither the NSW nor Victorian Acts authorise the offset mechanism. An owners corporation that cannot point to a statutory power for what it is doing is in a difficult position. Put simply, levy credits are beyond the powers of any owners corporation – this is how statutory interpretation works and there is no way around it.

• The tax implications are adverse. Lending Owners must pay tax on the interest they receive (ATO product ruling PR 2024/2).

• Sale complications may be significant. Assigning the Lending Owner's loan on the sale of their lot requires four parties – the seller, the purchaser, the strata lender and the owners corporation – to execute a deed and the owners corporation to convene a general meeting. In a standard property settlement window, this is very difficult to manage.

Hybrid strata loans do not meet the standards we set for lending in strata, which as a minimum include legislative and regulatory compliance. We made a deliberate decision not to offer them.

What has the Bugden Allen analysis confirmed?

The Bugden Allen analysis, published by partner and Fellow of the Australasian College of Strata Lawyers, Gerard Doyle, on 19 May 2026, confirmed our legal concerns with deep analysis of both the legislative framework that creates owners corporations and the powers they are granted.

The analysis observes that Section 100 of the NSW Strata Schemes Management Act 2015 and Section 25 of the Victorian Owners Corporations Act 2006 both grant owners corporations the power to borrow money, but finds that neither Act grants any power to credit a levy obligation against a debt owed by the owners corporation. This means the levy credit is ultra vires (Latin for 'beyond the powers', meaning the owners corporation has no legal authority to do it). This means that part of the loan contract will be void, with serious consequences for the rest of the loan agreement (which may itself be held to be void ab initio (from inception) due to this key term being invalid). It is not a minor drafting issue. This cannot be resolved by contract or by general meeting resolution,  it is the way in which strata legislation works.

The consequences Doyle identifies are severe:

• Lending Owners become unfinancial. Because the credit has no legal effect, the levy remains unpaid. In both states, unfinancial owners lose their right to vote at general meetings. The owners who lent to the owners corporation lose their governance rights.

• Owners corporations are in default of their agreements with the Lending Owners. As with the Lending Owners, the credit means that the owners corporation has not made the required repayments to the Lending Owners and so will be in default of the loan contract.

• Auditors cannot sign off. An owners corporation is required to reconcile every transaction against its bank records. With a levy credit, nothing appears on the bank statement, there is no bank entry to reconcile. An auditor cannot certify bank accounts which do not reflect transaction flows.

• The loan agreements may also be void for purporting to exclude legislative provisions. Both the NSW and Victorian Acts void contractual terms that purport to exclude or restrict the operation of the legislation. If the levy credit is struck out, other key provisions of the loan agreements may fall with it, potentially leaving lenders with no enforceable repayment obligation.

The irony is stark: the lot owners who agreed to fund the scheme's capital works – and who have in fact advanced their own money to the owners corporation – find themselves classified as non-paying owners, unable to participate in the democratic governance of their own scheme.

Gerard Doyle, Partner, Bugden Allen (May 2026) 

What is the answer?

If these so-called hybrid strata loans are the wrong answer, what is the right answer?

The answer lies in simplicity. If a special levy is the best funding option for a particular owners corporation in a particular situation, then that’s what the owners corporation should do. Any owners who have problems in funding the levy should seek other forms of finance, such as refinancing their mortgage. If a proper strata loan is the right funding solution, then those few owners who want to have a special levy can easily find better investments than lending to the corporation of which they are a member – a bank term deposit (guaranteed by the Australian government up to $250,000) is a good first port of call.

What should strata communities already in these arrangements do?

Many owners corporations entered hybrid strata loan arrangements in good faith, based on the information and advice available at the time. The Bugden Allen analysis is likely to prompt further discussion across the strata sector, and committees should seek independent legal and financial advice that takes the Bugden Allen analysis into account to better understand how the analysis applies to their particular circumstances. The instructions given to your advisers should clearly focus on statutory interpretation.

When it comes to strata, the gold standard for legal advice is from members of the Australasian College of Strata Lawyers. The Bugden Allen analysis is a significant piece of legal analysis that committees, advisers and owners corporations should now consider carefully when assessing how these products operate in practice. 

If you are evaluating your strata community's financing options and want to understand what a straightforward and legally sound strata loan looks like, we are happy to provide an information session with no obligation. A clean strata loan, one lender, one agreement, one repayment structure, is available now, and it does not carry any of the risks described above.

Lannock Strata Finance has been providing specialist strata loans to Australian communities for more than 20 years. We have seen products come and go. Our decision not to offer hybrid strata loans was not a competitive stance – it was a professional one. We are glad the analysis now available in the market supports that judgment.

To learn more about Lannock's approach: lannockstratafinance.com/lp/hybrid-strata-loan · Call 1300 851 585